Will Nedbank interims make things happen?

By Shaun Murison

Shaun Murison is a market analyst at IG
Shaun Murison is a market analyst at IG

South Africa’s fourth largest bank is set to report interim results on the 5th of August 2014.

The Nedbank Group uses nominal gross domestic product (GDP) growth as its benchmark in terms of a target for its own headline earnings per share (HEPS) growth. When we consider the South African Reserve Bank’s (SARB) expectation for real GDP growth (revised down) in 2014 to be 1.7% and their inflation outlook (revised up) for this year to be 6.3%, it would assume an increase in HEPS of around 8% as the company’s targeted goal. Nedbank itself was slightly more optimistic in Q1 2014 on the outlook for this year’s economic growth expecting adjusted real GDP to increase 2.5% which raises the HEPS target to 8.8%; although a contracting South African economy in Q1 amidst the contagion of prolonged labour inactivity would keep expectation erring on the side of caution.

The Q1 2014 earnings guidance released by Nedbank would suggest a strong Q2 was needed for the company to remain on track to achieving the earnings growth target over the interim period. The first three months of the six month reporting period was issued by Nedbank in May 2014. Growth realised over this period in net interest income (NII) increased by 8.7% while non-interest revenue (NIR) increased a marginal 2.7% (vs Q1 2013 comparative). Encouraging was the continued improvement in the company’s credit loss ratio which was reduced to 0.89% from 1.22%. In Q1 2013 NIR increased 8.1% indicating that Q1 2014 NIR growth of 2.7% is significantly behind the pace realised last year, while the same quarterly comparison shows the NII growth rate to be marginally ahead (8.7% vs 7.3%). NII provides a marginally higher proportion of revenue to the group than that of NIR.

Nedbank as well as its major banking peers look set for a slower rate of growth in 2014 than that realised in 2013. Rising interest rates in a higher inflationary environment and macro-economic concerns provide reason for the subdued expectation for growth, as consumers become stressed and emerging businesses become pressured.  However, while our local blue chip index trades above historical valuation means (in terms of price to book and price to earnings ratios); the major banking counters remain at a relative discount in our market whilst offering a healthy yield underpin in terms of dividends. The Nedbank Group is well poised to continue to deliver earnings growth from the Nedbank Corporate and Nedbank Capital divisions while marginal growth is expected from Nedbanks Retail division.

A Thompson Reuters poll of fourteen analysts surveyed shows two strong sell recommendations, five hold recommendations, five buy recommendations and two strong buy recommendations.

The long term trend for Nedbank remains up as the price trades firmly above the 200 day simple moving average. Although the share price is experiencing a short term decline in line with global market weakness, the retracement follows a new all-time high reached only a few days ago and may provide a short term opportunity for entry for longer term gains. The recent high at 24550 would provide an initial upside target, while a projection of the height of the recent price consolidation providing a further target at 25400.

Nedbank IG Markets

This article was originally published on IG.com 

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